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Tesla faces unprecedented, if not unbelievable, targets to ramp up Model 3 production to 20,000 units a month by year end — a key to Musk's plan to produce 500,000 vehicles in 2018 and about 1 million by 2020.

Model 3 launch could signal the beginning -- or end -- for Tesla

Can Tesla reach its own production goals with the Model 3 and still meet customer expectations?

July 10, 2017

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The time has come for Tesla Inc. CEO Elon Musk to fulfill the promise of moving from niche automaker to provider of affordable, all-electric cars to the masses.

After nearly a decade of producing premium, low-volume vehicles, the first production Model 3 — starting at about $35,000 — was expected to have rolled off the assembly line Friday, July 7, at Tesla's factory in Fremont, Calif.

The first 30 owners, many of whom are expected to be employees, are to receive their cars during a "handover party" on July 28.

But the celebration will be short-lived. Tesla faces unprecedented, if not unbelievable, targets to ramp up Model 3 production to 20,000 units a month by year end — a key to Musk's plan to produce 500,000 vehicles in 2018 and about 1 million by 2020.

"It is definitely a make-it-or-break-it moment for Tesla," said Mike Ramsey, a research director for Gartner Inc. "They have to produce a car that has fewer problems than the Model X. If the car comes out with the kind of issues the Model X had, it could be very damaging to Tesla."

Ramsey and others stressed they do not see Tesla folding if the Model 3 launch is problematic, but they said quickly filling hundreds of thousands of Model 3 reservations is critical for the company's business operations.

Tesla already has surpassed some expectations for the Model 3 by simply starting production and deliveries on time — a first for the 14-year-old company. Some analysts argue having a somewhat smooth production ramp-up of the car, even without hitting Musk's targets, would be a success.

"I don't think anybody actually anticipates that they're going to hit 500,000 in production," Ramsey said. "There's a huge 'Tesla discount' on that in reality. If they get to 250,000, I think that people would think that is a pretty huge success."

Morningstar analyst David Whiston expects Tesla to deliver 400,000 vehicles in 2018 and slightly more than 600,000 in 2019. In a note to investors, he advised it is "important to keep the hype about Tesla in perspective relative to the firm's very limited production capacity."

Tesla delivered only 76,000 vehicles globally in 2016. Increasing production to Musk's targets would arguably be the fastest production ramp-up in automotive history, according to industry analysts.

On Wall Street, many of those bullish on the company since its 2010 initial public offering have started questioning Tesla's market demand and excuses for missed delivery targets.

Ready or not, the Tesla Model 3 is on its way. Tesla head Elon Musk says the first production Model 3 is built and worthy of the road.This “production” car Musk ...

The company's share price plummeted about $60 a share through last week, trading around $310 a share Friday. The drop followed the news that Tesla missed Wall Street delivery estimates of its Model S and Model X luxury vehicles for the second quarter, the Insurance Institute for Highway Safety releasing that the 2017 Model S failed to earn its top safety rating and speculation about the company rushing production of the Model 3.

"While it is nice to see Tesla finally hit a stated target on time, we question whether 30 vehicle deliveries essentially built by hand count as 'mass production' and we also are surprised that this 'mass market' vehicle does not have official photos, options, pricing or really any details available," Jeff Osborne of Cowen & Co. wrote last week in a note to clients.

Tesla blamed the lower deliveries on a "severe production shortfall" in battery packs and not slowing demand, but Bank of America Merrill Lynch research analyst John Murphy said a carmaker should be able to handle such problems.

"Blaming lackluster deliveries on production issues may either be disingenuous or indicative that Tesla cannot solve simple production problems that every other major automotive manufacturer deals with on a regular basis," Murphy said.

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Distribution, sales

Aside from production growing pains, Tesla must address delivery and sales obstacles because of its direct sales being banned in many states and poor demand for all-electric vehicles amid low gasoline prices and a lack of infrastructure for the vehicles.

"There's a potential for something to go wrong right now that would affect Tesla more than any other vehicle manufacturer," said Dave Sullivan, an analyst with AutoPacific. "They do not have the network of support and service that everyone else has established."

According to its website, Tesla has about 70 service centers in the U.S., including 20 in its home state of California.

In an effort to address some concerns, Tesla has announced increases in its Supercharger stations, and it appears to be trying to increase service center locations by converting several of its retail galleries in multiple states into service and delivery centers as part of a potentially larger restructuring of its operations, Automotive News has learned.

The most recent changes affect a few dozen employees at seven locations in Georgia, Florida, Texas and Arizona. Most of the affected employees will be relocated, while some will be let go but eligible to apply for other positions within the company.

Aside from Florida, those states have posed challenges to Tesla's direct-sales efforts. The company is banned from selling in Texas and Arizona, but it has so-called "galleries," or storefronts, where consumers can find information about the vehicles but not purchase.

It’s not quite as severe as “any color as long as it’s black,” but buyers of the Tesla Model 3 will have a very limited number of options to choose from -- at least from the ...

A Tesla spokeswoman declined to comment on the changes.

Much of the hype and success surrounding Tesla comes from Musk. The tech billionaire has grown Tesla into an icon, with followers sometimes looking beyond significantly delayed product launches and quality problems.

He has arguably spun Tesla into the automotive industry's greatest brand accomplishment since Ferrari. But unlike the Italian brand, Tesla is moving into a harsher mainstream market.

Preorder demand for the Model 3 was unlike anything the auto industry has experienced. Tesla received 325,000 "reservations" that included a $1,000 cash deposit for the car in the first week of ordering. Many people placed the fully refundable deposits without seeing the car.

Strong demand means consumers placing new reservations aren't expected to receive their Model 3s until at least mid-2018 — a time frame that could make buyers impatient.

"The early customers are far more forgiving, but if you're hypothetically talking about half a million vehicles a year, these are not early adopters," said Joe Langley, principal analyst of North America light-vehicle production for forecasting firm IHS Markit. "They are not going to be as forgiving of things."